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An Essay Q g 



ON 



Political Economy. 



GEORGE G. McDONALD. 



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JAMAICA PLAIN : 

PRINTED BY J. ALLEN CROSBY. 

1898. 






3489 



AN ESSAY ON POLITICAL ECONOMY, 



BY 



george g. McDonald. 



— . 5 

Copyright 1 898, by George\G. McDonald. 



In the beginning of Economic History each man supplied 
his wants. As intelligence developed easier ways of sup- 
plying these wants were found : the spear, bow, and arrow 
were invented. Other inventions followed, until men found 
themselves compelled to follow three pursuits to make a 
living. These were hunting, agriculture, and manufacturing. 
Some men showed a particular talent for one of these pur- 
suits and a corresponding lack of talent for others. So, 
slowly the fact dawned on man, that three men, each of 
whom were engaged in a different pursuit, could produce 
more than three men, each of whom divided his time 
between the three pursuits. 

The perception of this fact inaugurated the age of barter 
and the division of labor. Man's wants more than kept 
pace with his producing power. One of the strongest of 
his wants was a desire to ornament his person. At first 
he used paint, then shells, and then metals. Silver and 
gold have ever been the favorites, because of their bright- 
ness, scarcity, and indestructibility. As men separated and 
settled in different communities, and ways of making a 
living multiplied, barter became more and more incon- 
venient. As a consequence of this there arose a demand 
for a form or forms of wealth that in a small space would 
be equivalent to other forms of wealth of greater bulk. 

Silver, gold, and copper fulfilled this demand, and when 
used in this connection are called money. As soon as a 



UCMJ 



money was found commerce sprung into a vigorous exist- 
ence. Some man by trading amassed a considerable 
amount of money. Finding there was a demand for 
certain kinds of goods, he hired men to manufacture these 
articles. This man was the first capitalist, and his action 
marked the beginning of what is called the industrial 
system. Others followed his example and the production 
of wealth became more rapid than ever before. At this 
point it will be well to examine what facts have now 
developed. First we see that that money or wealth has 
been used in a new way. Heretofore it has only been 
used to spend or gratify some wish ; but now, for the first 
time, money or capital has been put with labor for the 
production of more wealth. This money will be called the 
capital or production fund. Second, we see that men only 
manufacture what there is a demand for. When that 
demand is supplied the over production ceases, for those 
who consume will not buy because they have enough. This 
is called the action of the law of supply and demand. 
The action of the law in this case is to force some of those 
engaged in this occupation into others. Working in this 
way it has the effect of preventing too many from working 
at one pursuit. 

As the people will only buy of those who make the best 
and cheapest it also has the effect of selecting those best 
fitted for each occupation. This submitting by each of 
his productions, besides those engaged in the same line for 
the patronage of others, is what we call competition- 
History has progressed far enough so that we can notice 
two more facts in connection with the capital or the pro- 
duction fund. First, that capital requires labor; second, 
that this demand of the production fund for labor increases 
faster than the natural increase of laborers. The result of 
this is that labor steadily rises in value, and the laborer finds 



his ability to consume has kept pace with his constantly 
increasing ability to produce. 

In the next and last place we will notice that the value of 
capital is always marked by the rate of interest it will bring. 
As each new invention accelerates the production of capital 
we find that the supply is greater than the demand, and the 
rate of interest gradually falls. It will be urged against the 
statements made that they cannot be sustained by the facts 
as they stand to-day : instead of there being a constantly 
increasing wage it sometimes decreases, while the producing 
power is kept the same. While this is true, I think it must 
be quite plain that the order that has been indicated is 
the natural one. It is the course natural law would have us 
follow. Events progress this way for some years, and then 
comes a violent reversal of natural forces. This we call a 
panic. A panic is something that destroys a large part of 
the producing fund ; rapidly raises the rate of interest ; 
shuts down factories, throwing men out of work ; and 
it also destroys the market. As a consequence, prices 
fall and the manufacturer has to cut down the cost of 
production. This he generally does by cutting down the 
wages of his help. During the panic of 1893 all the things 
enumerated took place. Wages fell fully ten per cent. 
While the laborer's consuming power was cut down, his 
producing power was left the same. Out of a ten per cent 
cut down I doubt if the laborer gets over three per cent of 
it back in cheaper cost of living. In this fact we shall find 
one cause of what is called the over-production. It is hard 
to conceive of a general over-production. It would seem 
as if the consuming power of man would always outrun his 
producing power. 

Our present over-production is an under-consumption 
caused primarily by panics. There is a general complaint 
against trusts and monopolies. These institutions are 



directly traceable to this over-production. When there is 
an over-production of anything the natural tendency is for 
the price of that commodity to fall until production becomes 
unprofitable and stops. There is a check on the price 
falling too far, and that is speculation. The true office of 
speculation is to steady values. To-day it is generally used 
to unsteady them. If there is more wheat raised in a year 
than can be consumed, speculation steps in before the price 
has fallen too far, and carries the surplus of one year to the 
deficit of the next, thereby preventing extreme fluctuations 
during the the two years. When there is a continued over- 
production speculation cannot perform its office, so men 
whose business is affected by this over-production form 
themselves into combinations called trusts, for the purpose 
of controlling the production and thereby keeping the 
supply equal to the demand. By doing so they are able 
to command a fair price. Finding themselves able to 
demand a higher price they seldom fail to ask it. The 
Standard Oil Company is about the oldest monopoly in the 
country. There was a great over-production of crude oil, 
and there was neither price nor market for it. The 
Standard Oil Company developed the market ; and, as the 
over-production continued, it was able to pay its own price. 
Had there not been a large over-production of crude oil, 
there would not have been a standard oil company trust 
to-day. 

There is another complaint, and that is against competi- 
tion, especially where it applies to the laborers who compete 
with each other for employment. Competition, when it 
applies to merchandise, gives us the best and cheapest ; but 
when applied to labor, its effect is to cheapen the labor and 
degrade the laborer. I have seen the statement that when 
Thomas Hood wrote his "Song of the Shirt" women work- 
ing in the sweat shops of London received a penny an hour, 



~ 5— 

and to-day they only receive half a penny an hour. If the 
first statement is true I doubt not the second, for there has 
been a steady competition of laborers for work in this time, 
and the inevitable effect of competition is to lower the price 
of the article so affected. 

An investigation into the wages of sewing women in our 
large cities would probably show much the same result. On 
the other hand, the demand for skilled labor has generally 
been greater than the supply • so their wages show an in- 
crease during this time. This general over-production o 
labor that we have had in the last decade has had the same 
effect on laborers that an over-production has had on manu- 
facturers. They have formed themselves into combinations ; 
but not being able to limit the supply, and being consumers 
and not producers during a strike, they have not been as 
successful as the manufacturers. It is not difficult to see 
that if the natural course of events had taken their course 
the production fund would have grown to such proportions 
that it would have employed all the available labor. In 
this case we see that the burden of competition is shifted 
from the shoulders of the laborer to those of the manufac- 
turer. The competition is now between manufacturers for 
laborers. Then competition only enters the laborer's life to 
benefit it It gives him the highest price for his labor and 
the most and best merchandise for his wages. Under these 
conditions the old saying comes true, that "the laborer is 
worthy of his hire." 

The United States has had more financial panics than 
any other nation. There are a number of reasons for this. 
One is that we produce wealth faster than other nations 
because we use more machinery in production. Another 
is that up to within a few years taxes have been light, so that 
the government did not consume any of the production 
fund. One hundred thousand dollars taken by the govern- 



ment and spent might employ one hundred men one year, 
while if put into the production fund it would employ one 
hundred men permanently, and it would in twelve or fifteen 
years produce another hundred thousand that would em- 
ploy another hundred men. It seems to me that taxes 
should be kept at a reasonable point, and in general it is 
a good principle to put taxes on consumption. Men should 
be taxed for what they destroy and consume, and not for 
what they produce. If taxes could be levied this way the 
production fund would largely escape taxation. There is 
a fallacy that is universal among politicians and quite gen- 
eral among the people : that it is a good thing for the 
government to spend a large amount of money. They 
say it puts money in circulation. The laborer gets the 
money and he buys of the butcher, baker, etc., and 
they in turn buy of some one else. According to their 
theory there is no end to the good that a government dollar 
will do, and if the government would only spend enough of 
them we all ought to be happy. When a man gets fifty 
dollars from the government and spends it for merchan- 
dise, and consumes the merchandise so purchased, he has 
destroyed that fifty dollars of wealth as effectually as if he 
had burnt it. Money is the sign, the measure of value, as 
the pound is the measure of weight. If a man buys a 
pound of sugar he consumes the sugar not the weight that 
measured the sugar. The dollar goes on to measure more 
wealth and the weight to measure more merchandise. It 
is a good point to note that neither the number of pound 
weights nor the number of dollars in existence make 
business. They are facilities for doing business. To sum 
up this discussion of taxation, we would say that the 
government never contributed one dollar to the production 
fund directly ; but through the education, police protection, 
etc., it furnishes it contributes indirectly. 



— 7— 

Another thing that has helped to make our panics more 
frequent is that large amounts of foreign capital have been 
sent here which has been added to our production fund 
These things — rapid production of wealth, small taxes 
and foreign capital — being added to our production fund, 
have hurried us again and again to that point where it is 
much more profitable to export our gold or money than our 
merchandise. In the year 1892 business was good, the 
surplus labor on the market had been pretty well taken up, 
business was being done on conservative lines. The next 
year saw a change : prosperity was turned into depression, 
and the cause of it was that the cost of production had got 
so high in this country that when a foreigner shipped guods 
here and sold them, his best purchase was gold. One 
dollar in gold would buy more merchandise in Europe than 
here, and so he took it home with him. 

It is well to observe the fact that when we sell anything 
it is sold for money. To-day that money is changeable into 
gold without loss. And so long as that gold has a greater 
purchasing power abroad than it has here, just so long will 
gold continue to leave our shores. The value of gold is 
controlled by the same law that controls the value of other 
commodities, and that is the law of supply and demand. 
As gold goes abroad the supply becomes less, and gold 
rises in value. We say prices fall, in reality gold rises. It 
must be a blind man that has not observed these two facts 
in the last two years. Every market report that has read 
" Heavy gold shipments " prices fell off two or three points. 
If it has read, " Five million engaged for import," the 
market report has said, " Heavy gold importations, market 
bullish, gained two points." Had it not been for the fact 
that the wheat crop has been a failure in other parts of the 
world for two seasons, and made this country the only place 
to buy, there would not havj been any gold importations 



this year. To the fact that there was a failure of crops 
abroad we owe our present good price for wheat. If there 
is a good crop in Europe, South America, and India next 
year we shall surely see fifty cent wheat again in a year. 
There is no dearth of cotton, and the lowest price known 
is the result. It is in vain that the panic of 1893 is 
attributed to the fact that forty-eight million dollars of 
silver certificates were being added to the circulation. A 
too large increase of money means inflation. Inflation is 
another name for unnaturally high prices. Now the facts 
of the case are that prices did not advance during the years 
1S91 and 1892. The market was good and active during 
this time, and manufactured goods barely held their own 
in price. There should be three forces at work to govern 
prices — competition and invention to lower prices, and an 
increased value of labor to keep them up. 

Next, let us look at the panic of 1S57. In 1849 gold 
in large quantities was found in California. By 1852 and 
1S53 business commenced to feel the effect of an increased 
gold production in a liviier market and higher prices. 
In fact, times were good in 1853, 1S54, 1855, and 
1856. Then came the panic of 1857. Our gold went 
abroad the same in 1S57 that it did in 1S93. The 
value of a dollar rose and prices fell. The poor banking 
system in the country then was no doubt a factor in the 
cause of the panic. Next, let us look at England and see 
why she has not gone through the same experience that we 
have, although having the gold standard, and being one of 
the largest producers of capital, perhaps the largest in the 
world. Not long ago I saw the statement that the citizens 
of Great Britain had an annual income of more than one 
thousand million dollars from foreign investment. This 
will represent an investment of thirty thousand million dol- 
lars. As the capitalists of Great Britain have lost many 



— 9— 

thousand million in failures and panics in other countries, 
it is reasonable to suppose that at least thirty thousand 
million has been taken from, or rather is the result of, 
production in England. Had this sum been spent in con- 
structing other factories and works in England the demand 
for labor would have steadily risen in value. As it is, 
wages in England are going a little down hill. Germany, 
having a cheaper wage, is underselling the English. I saw 
the statement the other day that England's foreign com- 
merce has fallen fifty-five million a year compared to what 
it was twenty years ago. During one of the recent strikes 
in England I saw a comment from the London Times to 
the effect that if British workmen persisted in trying to 
raise their wages and kept preventing the introduction of 
labor-saving machinery England's foreign commerce must 
fall away, for the German, having a cheaper wage, would 
undersell them. The consequence of this taking the increase 
of capital and investing in other countries has been to keep 
the wages of Great Britain about stationary, and has pre- 
vented any perceptible rise in the cost of production. This 
is the reason why England has been so free from panics. 
Next let us look at the effect of this foreign capital in the 
countries where it has been invested. English capital has 
gone into all parts of the world. Especially can its effects 
be seen in the United States, Australia, and South America. 
The investing of foreign capital in this country has been 
a great factor in keeping up the wages of our workmen. 
It has offset the depressing erTect of the large amount of 
labor that has been thrown on our labor market by immigra- 
tion. It is estimated that there is between eight and ten 
thousand million dollars of foreign capital invested in this 
country, this brings an income of fully three hundred million 
dollars annually to its owners. So we see for the United 
States to pay its debts we must export at least three 



IO 

hundred million more than we import. This has put a 
leverage in the hands of foreign bankers, who control the 
foreign capital invested here. By taking their interest in 
gold they can depress the markets at will. By shipping in 
gold they can boom our markets. Market prices should 
be controlled by natural law ; but to-day they are controlled 
to a great extent by foreign capitalists who can manipulate 
our gold supply at will. If the interest on foreign invest- 
ments were paid in gold for two years we would have 
drained off all our gold supply. The effect of foreign 
capital going into South America and Australia so rapidly 
was to give an unnatural stimulus to business, creating an 
abnormal demand for labor at the time. As a consequence 
the cost of production rose rapidly, and when the English 
investor commenced to stop sending capital and demanded 
a return on his investment, the inevitable crash came. 
About one hundred and fifty years ago Holland was the 
first commercial nation on earth. Her bankers occupied 
the position that English bankers do to-day. The gold sup- 
ply was centered there. When a nation wished to borrow 
money they went to Holland and not to London. Holland 
at that time stood alone, in an industrial sense, and we shall 
find in her history a carrying out of the principle that, as 
an industrial nation grows richer the rate of interest falls, 
and the demand that capital makes for labor causes it to 
rise in value. At the time Adam Smith wrote his " Wealth 
of Nations" he speaks of the home government being able 
to borrow money at two per cent, and that four per cent 
was the going rate in business transactions. He also speaks 
of wages being higher in Holland than in England. Not 
many years after he wrote, "There came a fearful panic 
in Holland. The Dutch banks lost their standing and the 
gold supply centered in London. Holland had lost her 
position in the commercial world, yet her business men 



— II — 

were honest and conservative." It has been a matter of 
speculation to economists as to what was the real cause of 
her downfall. The truth of the matter is that a nation 
with a cheaper wage and greater inventive powers had 
become her competitor. As a consequence she was under- 
sold, the balance of trade set in against her, her gold 
supply went to pay this balance. As the money left the 
value of gold rose or, as people say, prices fell. This in- 
tensified the demand for money, and the rate of interest 
rose. The reason we do not sell more mannfactured goods 
abroad is that our cost of production has been higher than 
that of England. 

In the matter of bread stuffs we have been able to com- 
pete for two reasons : one is that we invented and used 
labor-saving agriculture machinery ; another, we have had 
a new rich soil. These advantages have more than offset 
the cheaper labor of other countries ; but the time has 
come when South America, Australia, and P:urope are using 
our machinery, and had it not been for short crops in the 
rest of the world for the last two years, we would be selling 
our wheat for fifty cents per bushel, as we did in 1893, 
1894, and 1895. Dollar wheat will pay a large balance 
against us, but fifty cent wheat only pays half as much. 
We must look for our gold to be exported under these con- 
ditions until it rises in value as high as it is in Europe. We 
will say prices fall ; but such will not be the case. Money 
rises in value. When it rises high enough and wages are 
low enough we shall have as large a foreign commerce as 
other nations, and not until then under our present money 
system. England's experience with free trade was thor- 
oughly satisfactory. Ricardo urged its adoption because 
English workmen could live cheaper, and the cost of pro- 
duction could be kept down so that English merchants 
could compete better with their rivals. The agriculturist 



12 

opposed it because it would compel him to sell his product 
cheaper. Both were disappointed in their expectations. 
England was at that time easily the cheapest market in the 
world in which to buy manufactured articles. As a conse- 
quence of this when a ship load of goods was sold a ship 
load was bought ; for there was no cheaper place to buy 
manufactured goods than in England. This stimulated 
manufactures, increased the demand for labor, and there- 
by increased its value. The home market became a much 
larger and better one than it had been to the agriculturist, 
so that at the time he did not suffer. Had there been a 
country that would have sold cheaper, the merchant would 
have sold his goods in England and taken the gold he re- 
ceived and purchased in the cheapest market. England 
being thus drained of its money the effect of it would have 
been to make her money rise in value. Her manufacturer 
would have said that the foreigner undersold him, and he 
would have demanded a protective tariff to protect him 
against this foreign rival. 

Commerce should be an exchange of merchandise. It 
is self-evident that the more there is shipped into a country 
the more has to be shipped out to pay for what has been 
shipped in. If the European can produce some articles 
cheaper or better let them do so. If the effect of this is to 
shut down a factory they must start others of our country- 
men to work to pay for what they have sold us. If the 
United States were to declare for free trade to-morrow and 
remove all custom duties, there can be no doubt but what 
the importations would be perhaps three times as large as 
at present ; the foreigner finding his gold dollar has a 
greater purchasing power abroad than here, would take it 
home with him ; our entire gold supply would hardly last 
the year out, and the same result would follow that has been 
pictured in England's case, on a higher cost of production. 
We see that really protection is a device for keeping gold 



—13— 

in the country by keeping foreign commerce out. It is not 
protection that we want, but a better money system. 

Money is the measure of value. The necessary qualifica- 
tion for a measure of any kind is that it should be constant. 
To illustrate the evil of a fluctuating measure of value we 
will suppose a farmer, whose only crop is wheat, borrows 
one thousand dollars in 1890 to be paid back in 1895 with 
interest at eight per cent. Wheat is worth a dollar a bushel 
in 1890 ; and we will suppose this farmer is capable of rais- 
ing one thousand two hundred bushels per year. Dividing 
it into day's labor, we will call it four bushels he is able to 
raise per day, his interest charges are eighty dollars per 
year or twenty days' labor. In 1893, 1894, and 1895 
wheat was at fifty cents. His interest charges are still 
eighty dollars ; but now they represent forty days' labor per 
year. Had he paid back his thousand dollars the year he 
borrowed it it would have only represented two hundred 
and fifty days' labor. In 1895 it represented five hundred 
days' labor. On the other hand, suppose because of an 
inflated money, wheat brought two dollars per bushel. Now 
the farmer's interest charges only represent ten days' labor, 
and the principal one hundred and twenty-five days' labor* 
In this case the creditor is cheated, and the effect of the 
inflation was to wipe out one half of the value of the avail- 
able capital of the country. Under a rising money standard 
men tend to hoard their money. Suppose prices fall ten per 
cent in a year, the man that has kept his dollar in his pocket 
has made ten per cent by doing so. The man that invested 
in merchandise and had to hold it, has lost ten per cent. 
On the other hand, suppose that prices rose ten per cent. 
Now the investor makes and the holder loses, for his dollar 
will not purchase as much as it did the year before. This 
fact is generally seen, and during a rise in value the circula- 
tion is unduly forced, and injurious speculation is the result. 



—14— 

What we want is a money that will cheat neither debtor nor 
creditor — one that men will neither gain nor lose by a 
simple investment or failure to invest. 

There are two kinds of money in the world. One is 
legal tender, the other is non-legal tender. This kind of 
money consists of checks, drafts, etc., and constitutes about 
ninety per cent of all the money in circulation. The gov- 
ernment collects about one thousand million dollars per year 
from her citizens. If the government chooses to say that 
a piece of paper instead of a piece of gold shall convey the 
labor of the tax payer to it, that piece of paper has 
received value because of the government fiat. There is, 
of course, a limit to the amount of value that the govern- 
ment can so give to pieces of paper ; but I believe that it 
can so create enough money — good money — to carry on 
business. 

We have to-day two forms of paper money — the national 
banknote and the greenback. With proper banking facilities 
in every community the national banknote seems to be an 
ideal money. A national bank is really a factory for the pro- 
duction of money of both kinds, legal and non-legal tender 
The production of money is here put on the same basis as 
the production of other things, and it will be controlled as it 
should be, by the law of supply and demand. On the 
other hand, if we have greenbacks their issue must depend 
on a vote of Congress ; and it is harder to tell the amount 
of money wanted than that of any other commodity. 
Once the danger of having our money exported is done 
away with and values get settled, I don't believe the amount 
of legal tender money that is necessary is as large as 
generally supposed. Another objection to the greenback 
is, that with every issue would come the agitation of the 
debtor or creditor that he was being cheated. Under these 
agitations business could not proceed. 



—i5— 

Under a correct money the importation or exportation of 
a hundred million of gold would neither lower nor raise the 
value of a dollar as it does to-day. We could enjoy and 
prosper under free trade while having even a higher wage 
standard than Europe. Many nations have tried a paper 
money, and all have a better experience to relate, still we 
must remember that it carried us through the great re- 
bellion. There was inflation during the war, and con- 
traction after the war. This contraction and consequent 
decline in prices caused the panic of 1873. The man that 
owed a dollar in 1866 owed in 1872 a dollar that it took 
more than twice as much labor to produce. Capital could 
not earn any such return, so those that owed could not 
meet their obligations. Men by keeping their money in 
their pockets from 1866 to 1873 could get greater return 
than they could by putting it into business. This contrac- 
tion by the government forced a greater contraction by the 
people, which finally culminated in the panic of 1873. 



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